Money Market
Content
Name: Abhisek Baradia.
Room: 31.
Roll No: 390.
Subject: Financial Market operation & financial market analysis.
Money Mobilisation from Capital Market & its Impact on the Economic Growth of India.
INTRODUCTION
A market in which, individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is tapping the investing public for capital and is therefore using the capital markets. This is also true when a country's government issues Treasury bonds in the bond market to fund its spending initiatives.
OBJECTIVES OF THE STUDY
The main interest of this study is to understand the working of the capital markets and the sources from which fund is mobilized. We all know how Capital market plays an important role in mobilizing resources, and diverting them in productive channels. The objectives can be highlighted as under. Understanding of the Capital Market. Study of Capital Markets in reference to the Indian Economy. How Capital Markets facilitates and promotes the process of economic growth in the country. Regulations in the capital markets.
INSTRUMENTS IN CAPITAL MARKETS:
Capital markets may be classified as: a) Primary Markets and b) Secondary Markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.
Instruments in Primary Capital Market:
Instruments in Secondary Capital Markets:
In Equity Market: Equity Bonds In Derivatives Markets: Options. Futures.
CAPITAL MARKETS IN INDIA:
There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges. In terms of the number of companies listed and total market capitalization, the Indian equity market is considered large relative to the country’s stage of economic development. The number of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same Period. Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as “brokers clubs” as their management was largely composed of brokers. There was no prohibition on insider trading, or fraudulent
and unfair trade practices. Since 1992, there has been intensified market reform, resulting in a big improvement in securities trading, especially in the secondary market for equity. Most stock exchanges have introduced online trading and set up clearing houses/corporations. A depository has become operational for scripless trading and the regulatory structure has been overhauled with most of the powers for regulating the capital market vested with SEBI. The Indian capital market has experienced a process of structural transformation with operations conducted to standards equivalent to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary segments of the capital market expanded rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. However, many problems, including lack of confidence in stock investments, institutional overlaps, and other governance issues, remain as obstacles to the improvement of Indian capital market efficiency.
IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH IN INDIA:
The joint paper released by PricewaterhouseCoopers (PwC) and ASSOCHAM titled “The Indian capital market: Growth with governance”, charts the journey of the Indian capital market from the pre-reform era to the liberalized market of this decade. India’s financial markets were impacted significantly by the crisis which originated in the United States; India’s dramatic growth was fuelled by significant foreign capital flows; Indian banks and corporate found their overseas financing drying up, forcing the corporate to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from the domestic money market mutual funds, putting redemption pressure on the mutual funds and non- banking financial institutions. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. The foreign exchange market came under pressure because of reversal of capital flows as part of the global deleveraging process. Apart from the financial market effect, the slump in exports also added to the trouble. The United States, European Union and the Middle East, which account for three quarters of India's goods and services trade, were in a synchronised down turn. The Indian economy witnessed moderation in growth in the second half of 2008–09 in comparison with the robust growth performance in the preceding five years. The deceleration in growth was particularly noticeable in terms of negative growth in industrial output in Q4 of 2008–09 - a decline for the first time since the mid-1990s. This was on account of erosion of external demand which affected industrial performance; a reflection of increasing globalisation of the Indian industry .The transmission of external demand shocks was swift and severe on export growth, which declined from a peak of about 40 % in Q2 of 2008–09 to - 15 % in Q3 and further to - 22 % in Q4; a contraction for the first time since 2001–02. Concurrently, domestic aggregate demand also moderated resulting from sharp deceleration in the growth of private consumption demand. In order to respond to the slowing demand, fiscal stimulus measures were undertaken by the government which included both tax cuts and increase in expenditure. This raised the fiscal deficit of the Central Government by 3.5 % of GDP in 2008–09. Consequently, the growth in government final consumption expenditure registered a sharp increase in Q3 and Q4 of 2008–09. For example, if we see the GDP growth rates in the Indian economy (Figure 1) the economy which was projected to grow at 9% fell to 6%. Even though 6% is better that what developed economies grew at in
the recessionary period, it was simply not good enough for an emerging economy like India because of the smaller base at which we operate on. Even if we look at the Balance of Payments scenario (Figure 2) there was a significant deterioration in the situation in 2009.
Regulatory Framework
Securities and Exchange Board of India: Securities and Exchange Board of India (SEBI) was set up as an administrative arrangement in 1988. In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It mandates SEBI to perform a dual function: investor protection through regulation of the securities market, and fostering the development of this market. SEBI has been delegated most of the functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock exchanges, their members, as well as contracts in securities which could be traded under the regulations of the Ministry of Finance. Reserve Bank of India: Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this has been limited to debt management through primary dealers, foreign exchange control, and liquidity support to market participants. Department of Company Affairs: In 1947, the Capital Issues (Control) Act was enacted, which formalized and continued initial controls on the issue of securities that were introduced during World War II. This Act was administered by the office of the Controller of Capital Issues (CCI), which was a part of the Ministry of Finance. In line with economic reforms, it was repealed in 1992 to liberalize capital issuance and pricing. While capital issuance used to be regulated by the office of the CCI, both private and public companies were governed by the Companies Act of 1956, which was and continues to be administered by the Department of Company Affairs (DCA) under the Ministry of Law, Justice and Company Affairs
REGULATION OF INTERMEDIARIES
Participants in the Indian capital market are required to register with SEBI to carry out their businesses. These include: Stockbrokers, subbrokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and other such intermediaries who may be associated with the securities market in any manner; Depositories, participants, custodians of securities, FIIs, credit rating agencies, and other such intermediaries who may be associated with the securities market in any manner; and Venture capital funds and collective investment schemes, including mutual funds.
CONCLUSION:
In a new report, Indian Capital Markets: Trends and Prospects, Celent analyzes trends and opportunities in various segments of the Indian capital market including the equity, debt, and derivatives segment. Main findings of the study include: Though the Indian equity market is highly attractive, it lacks depth and breadth with limited reach and high concentration in trading among a few companies. India’s debt market is underdeveloped; the corporate debt segment is not significant. India’s derivatives market is growing, but needs to develop further in terms of products and investor base. “India’s advantage lies in its sound regulatory environment, which shielded the markets, to some extent, from a larger negative impact of the global financial crisis and helped them to regain their mark quickly afterwards,” says Arin Ray, Analyst with Celent’s Indian Financial Services Group.
Works Cited
Cho, Y. J. (n.d.). Indian Capital Market. Retrieved February 21, 2012, from http://www.adb.org: http://www.adb.org/documents/books/rising_to_the_challenge/india/indiacap.pdf Financial Technologies Knowledge Management Company Limited. (n.d.). Knowledge for Markets. Retrieved February 22, 2012, from http://www.ftkmc.com/: http://www.ftkmc.com/equities.html PWC and ASSOCHAM. (n.d.). The Indian capital market: Growth with governance. Retrieved February 21, 2012, from http://www.pwc.com: http://www.pwc.com/in/en/publications/indiacaptial-market-11-feb.jhtml
Room: 31.
Roll No: 390.
Subject: Financial Market operation & financial market analysis.
Money Mobilisation from Capital Market & its Impact on the Economic Growth of India.
INTRODUCTION
A market in which, individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is tapping the investing public for capital and is therefore using the capital markets. This is also true when a country's government issues Treasury bonds in the bond market to fund its spending initiatives.
OBJECTIVES OF THE STUDY
The main interest of this study is to understand the working of the capital markets and the sources from which fund is mobilized. We all know how Capital market plays an important role in mobilizing resources, and diverting them in productive channels. The objectives can be highlighted as under. Understanding of the Capital Market. Study of Capital Markets in reference to the Indian Economy. How Capital Markets facilitates and promotes the process of economic growth in the country. Regulations in the capital markets.
INSTRUMENTS IN CAPITAL MARKETS:
Capital markets may be classified as: a) Primary Markets and b) Secondary Markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.
Instruments in Primary Capital Market:
Instruments in Secondary Capital Markets:
In Equity Market: Equity Bonds In Derivatives Markets: Options. Futures.
CAPITAL MARKETS IN INDIA:
There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges. In terms of the number of companies listed and total market capitalization, the Indian equity market is considered large relative to the country’s stage of economic development. The number of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same Period. Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as “brokers clubs” as their management was largely composed of brokers. There was no prohibition on insider trading, or fraudulent
and unfair trade practices. Since 1992, there has been intensified market reform, resulting in a big improvement in securities trading, especially in the secondary market for equity. Most stock exchanges have introduced online trading and set up clearing houses/corporations. A depository has become operational for scripless trading and the regulatory structure has been overhauled with most of the powers for regulating the capital market vested with SEBI. The Indian capital market has experienced a process of structural transformation with operations conducted to standards equivalent to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary segments of the capital market expanded rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. However, many problems, including lack of confidence in stock investments, institutional overlaps, and other governance issues, remain as obstacles to the improvement of Indian capital market efficiency.
IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH IN INDIA:
The joint paper released by PricewaterhouseCoopers (PwC) and ASSOCHAM titled “The Indian capital market: Growth with governance”, charts the journey of the Indian capital market from the pre-reform era to the liberalized market of this decade. India’s financial markets were impacted significantly by the crisis which originated in the United States; India’s dramatic growth was fuelled by significant foreign capital flows; Indian banks and corporate found their overseas financing drying up, forcing the corporate to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from the domestic money market mutual funds, putting redemption pressure on the mutual funds and non- banking financial institutions. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. The foreign exchange market came under pressure because of reversal of capital flows as part of the global deleveraging process. Apart from the financial market effect, the slump in exports also added to the trouble. The United States, European Union and the Middle East, which account for three quarters of India's goods and services trade, were in a synchronised down turn. The Indian economy witnessed moderation in growth in the second half of 2008–09 in comparison with the robust growth performance in the preceding five years. The deceleration in growth was particularly noticeable in terms of negative growth in industrial output in Q4 of 2008–09 - a decline for the first time since the mid-1990s. This was on account of erosion of external demand which affected industrial performance; a reflection of increasing globalisation of the Indian industry .The transmission of external demand shocks was swift and severe on export growth, which declined from a peak of about 40 % in Q2 of 2008–09 to - 15 % in Q3 and further to - 22 % in Q4; a contraction for the first time since 2001–02. Concurrently, domestic aggregate demand also moderated resulting from sharp deceleration in the growth of private consumption demand. In order to respond to the slowing demand, fiscal stimulus measures were undertaken by the government which included both tax cuts and increase in expenditure. This raised the fiscal deficit of the Central Government by 3.5 % of GDP in 2008–09. Consequently, the growth in government final consumption expenditure registered a sharp increase in Q3 and Q4 of 2008–09. For example, if we see the GDP growth rates in the Indian economy (Figure 1) the economy which was projected to grow at 9% fell to 6%. Even though 6% is better that what developed economies grew at in
the recessionary period, it was simply not good enough for an emerging economy like India because of the smaller base at which we operate on. Even if we look at the Balance of Payments scenario (Figure 2) there was a significant deterioration in the situation in 2009.
Regulatory Framework
Securities and Exchange Board of India: Securities and Exchange Board of India (SEBI) was set up as an administrative arrangement in 1988. In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It mandates SEBI to perform a dual function: investor protection through regulation of the securities market, and fostering the development of this market. SEBI has been delegated most of the functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock exchanges, their members, as well as contracts in securities which could be traded under the regulations of the Ministry of Finance. Reserve Bank of India: Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this has been limited to debt management through primary dealers, foreign exchange control, and liquidity support to market participants. Department of Company Affairs: In 1947, the Capital Issues (Control) Act was enacted, which formalized and continued initial controls on the issue of securities that were introduced during World War II. This Act was administered by the office of the Controller of Capital Issues (CCI), which was a part of the Ministry of Finance. In line with economic reforms, it was repealed in 1992 to liberalize capital issuance and pricing. While capital issuance used to be regulated by the office of the CCI, both private and public companies were governed by the Companies Act of 1956, which was and continues to be administered by the Department of Company Affairs (DCA) under the Ministry of Law, Justice and Company Affairs
REGULATION OF INTERMEDIARIES
Participants in the Indian capital market are required to register with SEBI to carry out their businesses. These include: Stockbrokers, subbrokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and other such intermediaries who may be associated with the securities market in any manner; Depositories, participants, custodians of securities, FIIs, credit rating agencies, and other such intermediaries who may be associated with the securities market in any manner; and Venture capital funds and collective investment schemes, including mutual funds.
CONCLUSION:
In a new report, Indian Capital Markets: Trends and Prospects, Celent analyzes trends and opportunities in various segments of the Indian capital market including the equity, debt, and derivatives segment. Main findings of the study include: Though the Indian equity market is highly attractive, it lacks depth and breadth with limited reach and high concentration in trading among a few companies. India’s debt market is underdeveloped; the corporate debt segment is not significant. India’s derivatives market is growing, but needs to develop further in terms of products and investor base. “India’s advantage lies in its sound regulatory environment, which shielded the markets, to some extent, from a larger negative impact of the global financial crisis and helped them to regain their mark quickly afterwards,” says Arin Ray, Analyst with Celent’s Indian Financial Services Group.
Works Cited
Cho, Y. J. (n.d.). Indian Capital Market. Retrieved February 21, 2012, from http://www.adb.org: http://www.adb.org/documents/books/rising_to_the_challenge/india/indiacap.pdf Financial Technologies Knowledge Management Company Limited. (n.d.). Knowledge for Markets. Retrieved February 22, 2012, from http://www.ftkmc.com/: http://www.ftkmc.com/equities.html PWC and ASSOCHAM. (n.d.). The Indian capital market: Growth with governance. Retrieved February 21, 2012, from http://www.pwc.com: http://www.pwc.com/in/en/publications/indiacaptial-market-11-feb.jhtml
